(Bloomberg) -- Japanese Prime Minister Fumio Kishida stepped up his efforts to encourage companies to hike pay, meeting with union and business leaders as annual spring wage negotiations kick into high gear.

“For overall wage gains in Japan, it’s essential to raise pay at small and medium-sized companies, which employ 70% of workers in Japan,” said Kishida after a meeting that focused in part on the outlook for gains at smaller businesses. 

“The private and public sectors will together create the conditions this summer for growth in disposable income that will outpace inflation through wage hikes and income tax cuts,” he added. The three sides last met in November. 

The wage negotiations are an important element for the Bank of Japan’s goal of achieving a virtuous wage-price cycle that sustains growth, paving the way for a withdrawal of long-running monetary support for the economy. 

The government has been intensifying its campaign to encourage wage hikes through measures including tax breaks for companies that do so. It’s also designing a subsidy program for firms going digital to boost wages for each worker. A tax rebate in the summer will offer additional support for households struggling with the highest inflation levels in decades.

Dissatisfaction over falling real wages has been one of the factors undermining support for Kishida’s government, which remained under 30% in a series of polls published Monday — a level seen as the danger zone for Japanese premiers. 

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Tomoko Yoshino, leader of the Japanese Trade Union Confederation, commonly known as Rengo, said it was important to secure larger wage gains this time round compared with those in 2023, adding the three sides were facing in the same direction. 

Monday’s meeting included a review of progress made by smaller businesses in passing on labor costs to consumers and clients, a challenge identified earlier as a primary obstacle to achieving smooth wage increases at those firms.

If higher labor costs can’t be passed on by smaller companies, then wages won’t rise across society as a whole, said Masakazu Tokura, head of big business lobby Keidanren. He called for raises above the 2% inflation goal set by the government and BOJ, while acknowledging this put smaller firms in a difficult spot.

Last year’s wage talks showed that smaller companies lag their bigger counterparts in committing to aggressive hikes. In Rengo’s first tally in mid-March, reflecting outcomes of pay talks for larger companies, the average deal resulted in a 3.8% hike, while that average dropped to 3.58% in July after results from more small and medium-sized enterprises were factored in.

The BOJ’s regional hearings earlier this month also suggested high uncertainty over the extent and spread of wage growth, especially among small businesses.  

Still, BOJ Governor Kazuo Ueda indicated in December that it would be possible to make some policy decisions even if the bank hasn’t yet seen the full results of spring wage negotiations from SMEs. That comment added to speculation over a possible move in April.

--With assistance from Emi Urabe and Momoka Yokoyama.

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